Portfolio

Monday, February 6, 2017

TLH Market Review - 2/4/16

First of all sorry this did not get published over the weekend. The auto-scheduler wasn't set and I overlooked it.

It was a busy week with news from the Fed, economic reports, and plenty of earnings so I won't be wasting anyone's time here today. So like a grizzly on a salmon let's get on it.

The Federal Reserve released their FOMC rate decision which you can read here. At first look it seems the Fed is pretty bullish on the economy relative to their tepid wait & see outlook for most of 2016. The market I think actually agrees. The economy is still growing. The clip and pace of growth isn't meteoric by any measure. Yet it's still growth. Participants think the Fed will raise rates next at the June meeting with 60%+ odds still. I'd say that's about right. If not then I could easily see a September hike as the next likely target.

Now of course Janet Yellen & Co. would love much stronger gains in employment as NFP came in at 227k, while ADP's report came in at 246k. Plus Average Hourly Earnings, +0.1% and the Employment Cost Index +0.5% both came in a tad weaker than expected. That's enough for the Fed to take pause and think about what to do. Add in weaker construction spending (-0.2%) and you can see why the Fed always has a mixed bag in their hands.

Two good numbers were the ISM Index and ISM Services. Both came in roughly in line with expectations, and continue to hold up well. The ISM Index registered a 56.0 vs expectations for 55.2, while Services registered 56.5 vs expectations for 56.9. Both numbers held steady from prior readings. Remember anything over 50 shows growth.

Earnings

We received earnings from MasterCard(MA), Visa(V), Altria(MO), Phillip Morris(PM), Hershey(HSY), and Facebook(FB).

MasterCard & Visa both had what I thought were good quarters. At first the market punished MA, and rewarded V. Although MasterCard eventually got a boost after Visa reported. Odd, but the market makes some perplexing moves in the short run. I'm going to keep my analysis simple here by taking a look at the net profit margin for each company in the last 5 quarters starting with their MRQ.MAVQ1 33.8% 46.4%Q2 41.1% 45.3%Q3 36.4% 11.3%Q4 39.2% 47.0%Q5 35.3% 54.4%

Yes they make a lot of money, and they have performed very well versus the S&P 500 over the last 5 years. MasterCard is up 175%, Visa is up 212%, and the S&P 500 is up 70%. I think we know which ones we'd rather own.

Additionally Altria(MO) and Phillip Morris(PM) both had results that helped ease investors concerns about declining traditional cigarette volumes. Both companies are working together to develop Reduced Risk Products. It appears those efforts are starting to finally gain some traction. Also Altria looks to be on track to delivering PM's IQOS products this year. E-cigs are seeing some big growth finally after starting off very small. That led a lot of investors to thinking that there wasn't much room in the industry for the products. It looks like customers are seeing it now as some traditional smokers switch over, and possibly brings back into the fold new ones. Phillip Morris saw their HeatStick product increase volumes from 396 million to over 7 billion for the year. That's huge growth.

Facebook(FB) was probably the earnings story of the week as everyone awaited their results. It's crazy to think how in just 5 years since the company had their IPO they are now one of the largest companies by market cap in the world. Breathtaking. By my calculations the company is trading at a P/E of approximately 38. That's not cheap. But looking around I see a lot of other blue chips trading at 25+. Some even up to 35. So it's not terribly out of line considering Facebook still has exploding revenue growth which is absent from plenty of other companies. Now I don't think the stock is going to rip 40% higher this year, but I still would not count them out just yet. Their future prospects look good, and it remains to be seen what other products they have in the works. It's also quite clear the company is adept at monetizing it's customers. That's not an easy task. If anything maybe the stock takes a breather from it's fantastic run the last couple years before moving on ahead. Besides Zuck & Co. also re-iterated revenue growth was going to slow this year, and expenses were going to come in higher. If you're not sure what that means it's basically saying they will make less money. Comparatively.

Hershey's(HSY) reported their Q4 & FYE'16 results Friday morning. Q4 EPS came in at $0.55 on revenues of $1.97 billion. FYE'16 EPS came in at $3.34 on revenues of $7.44 billion. The company did a great job managing margins for the year as they saw increases in 2/3 metrics. Operating Profit Margin rose 2.2% to 16.2% and Net Profit Margin rose 2.8% to 9.7%. The company provided guidance for 2017 which included sales rising 2-3%, EPS of $4.54-$4.65 also includes a $0.05 benefit from new accounting standard (ASU) 2016-09. Based on the numbers above the stock has a forward P/E of 23, or an earnings yield of 4.2%. Not terribly cheap, but as noted above compared to other blue chips this actually almost constitutes a bargain. With the exception of big names like IBM(which we own), and AAPL, it's really hard to find any solid large caps trading with decent valuations. Here are the CEO"s remarks.

"I'm pleased with our fourth-quarter results, particularly operating profit that was greater than our expectations, and marketplace performance, which sequentially improved throughout the year, resulting in an increase in our candy, mint and gum (CMG) market share," said John P. Bilbrey, Chairman, President and Chief Executive Officer, The Hershey Company. "Additionally, the implementation of efficiency initiatives related to the review of our cost structure resulted in lower selling, marketing and administrative (SM&A) expenses versus our forecast. These initiatives, which we will discuss more broadly at our investor update on March 1, 2017, enabled us to deliver additional operating income growth earlier than planned resulting in 2016 earnings per share-diluted ahead of our forecast. Our U.S. marketplace performance was in line with our expectations across all retail channels driven by seasonal results. Our brands responded positively to our Halloween and Holiday investments and we gained 0.3 market share points in each season. Cash flow generation, a hallmark of the company, remains strong as we generated operating cash flow of nearly $1 billion in 2016. Combined with our solid balance sheet this enabled us to return about $920 million to stockholders via dividends and share repurchases."

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